Trading system

ABSTRACT

An anonymous trading system includes a prime broker facility that allows a third party to trade on behalf of an institution. A deal is executed between the third party and a counter-party and a further deal is then executed between the third party and the party on whose behalf it has traded. The second deal may be for the same amount as the first deal or may be altered to include the third party&#39;s fee for conducting the first deal. Clients of the third party have prices available to them for trades made via the third party which are displayed at their trader terminals. The client sees that a better price is available though the third party than by dealing direct and selects to conduct a deal through the third party.

CROSS-REFERENCE TO RELATED APPLICATION

This application is a divisional of U.S. application Ser. No.10/694,758, filed Oct. 29, 2003, which claims benefit of U.S.Provisional Application No. 60/421,792, filed Oct. 29, 2002, each ofwhich is hereby incorporated by reference.

FIELD OF THE INVENTION

This invention relates to trading systems for trading fungibles such as,but not limited to, financial instruments. It is particularly, but notexclusively, concerned with anonymous trading systems where the identityof counterparties to deal is not known until the deal is completed. Itis also concerned with increasing the liquidity in the market ofinstruments that are being traded on trading system.

BACKGROUND TO THE INVENTION

In the following discussion, the invention is disclosed with respect toa particular financial instrument, FX spot, traded on an anonymoustrading system. It is to be understood that the invention is applicableto any trading system in which credit is assigned by at least one partyto possible deals with one or more counterparties, and to the trading ofany fungible. The fungible may be an instrument such as a financialinstrument but could also be any other type of fungible such as acommodity for example metals, energy, foodstuffs etc. The invention isalso applicable to any financial instrument including, but not limitedto, FX products such as, but not limited to, Spot, forwards, outrights,FRA's and futures and other non-FX products such as equity products.

The term fungible used herein means any product that is capable of beingtraded.

Anonymous trading systems are well known and have been used to tradefinancial instruments such as Foreign Exchange (FX) Spot for a number ofyears. Examples of anonymous trading systems are disclosed in U.S. Pat.No. 5,375,055 and EP-A-0399850. In each of these systems, part of atrading book is distributed to a trader's workstation. Traders submitquotes to the system anonymously which quotes are matched by a matchingengine to execute deals after credit limits have been checked. In ananonymous trading system, traders are presented with quotes that havebeen entered into the market by counter-parties. The trader can attemptto deal with these quotes but does not know the identity of thecounter-party with whom he is dealing. This identity is only given upwhen the deal has been completed. As the identity of the counter-partyis unknown, the trader's financial institution assigns credit limits totrades with all possible counter-parties trading on the system. Creditlimits limit the institution's exposure should the counter-party defaulton a deal and are an indication of the risk represented by trading witheach counter-party. U.S. Pat. No. 5,375,055 discloses the concept ofscreening quotes input into the system and only displaying to a givenuser those quotes with which they have credit to trade. This avoids thepossibility of a trader trying to trade a quote only to find that thedeal is refused through lack of credit. In a fast moving volatile marketthis can cause a trader to lose a trading opportunity.

Interbank anonymous trading systems have been very successful. Howeverthey are largely limited to major banks. Smaller banks have limitedaccess to the systems as they are not allocated sufficient credit by themajor banks to ‘see’ the best prices. One reason for this is the riskperceived by the larger banks of trading large amounts with smaller,less credit worthy, banks. Because a smaller bank does not have any ormuch credit with many of the counter-parties on the system, and becauseundealable quotes are hidden, a smaller bank has only a limited subsetof quotes with which it can trade. The quotes are often not the bestprices in the system. As a result, the smaller banks are at adisadvantage and tend not to use the systems, preferring to tradethrough other channels such as direct dealing systems or conventionalvoice brokers. This is undesirable from the point of view of the smallerbanks as they are not getting the best deals available. It is alsoundesirable from the point of view of the trading system operator as thepotential liquidity of the system is reduced. Liquidity is a measure ofthe number of quotes in the system and must reach a certain level beforethe system becomes a viable trading forum. The loss of smaller banks inthe more common currency pair markets such as USD:JPY (United StatesDollar to Japanese Yen) is not critical to the operation of thesemarkets but it is more important in less liquid markets, for exampleUSD:AUD (United States Dollar to Australian Dollar).

SUMMARY OF THE INVENTION

There is a need therefore to address the problem of allowing smallerinstitutions to trade on a system in which they have limited credit withmany of the counter-parties, without being forced to accept poor prices.The present invention aims to address that need.

According to the invention there is provided a method of tradinginstruments on a trading system in which a plurality of counter-partiestrade with each other comprising the steps of: displaying to a firstparty a quote having the best price in the market for which a thirdparty has credit to deal; initiating by the first party a trade at thebest price, wherein the trade is conducted by executing a first dealbetween the third party and the counter-party owning the best pricequote; and executing a second deal between the third party and the firstparty, the amount of the second deal being the same as the amount of thefirst deal.

The invention also provides a method of executing trades on a tradingsystem comprising a plurality of counter-parties, comprising: displayingto a first trading party on the system the best price available bytrading through a third party; executing a first deal between the thirdparty and the party offering the best price; and executing a second dealbetween the third party and the first trading party for the same amountas the amount of the first deal.

The invention also provides a trading system for trading fungiblesbetween counter-parties, the trading system comprising: a matchingengine for matching quotes for execution of deals; a plurality oftrading floors for receiving price information relating to quotessubmitted by counterparties with whom the trading floors have credit;the price information communicated to at least one trading floorincluding the best price in the market for which a third party hascredit to deal; a trade initiator at a first party trading floor forinitiating a trade at the best price, the trade being conducted byexecuting a first deal between the third party and the counter-partyowning the best price quote; and wherein the third party comprisessoftware for executing said first deal and executing a second dealbetween the third party and the first party, the amount of the seconddeal being the same as the amount of the first deal.

The invention further provides a system for executing trades on atrading system comprising a plurality of counter-parties, comprising:software for executing a first deal between a third party and a partyoffering the best price, the third party trading on behalf of a firstparty; and software for executing a second deal between the third partyand the first trading party for the same amount as the amount of thefirst deal.

In a preferred embodiment of the invention, an institution trading on ananonymous trading system may act as a prime broker, conducting trades onbehalf of parties who have no credit with a party who is offering thebest price in the market. Institutions who are willing to trade via aprime broker are shown the best price that is available to them. If theydo not have credit with the owner of that price, a trade will beconducted on their behalf by the prime broker. A second trade is thenconducted for the same amount between themselves and the prime broker.The price at which the second trade or deal is executed may be the sameas that of the first deal or it may be adjusted to incorporate the primebroker's fee. Preferably the prime broker is assigned a deal code uniqueto trades conducted on behalf of clients. The other side to thesetrades, and other traders on the trading system, will not be aware ofthe identity of the party on whose behalf the prime broker is trading.

Prime broker trades are initiated by a trader at the client institution.The trader may have a single workstation that gives him the option oftrading on behalf of his institution or via a prime broker.Alternatively he may have a dedicated terminal or workstation for primebroker trades. Such a terminal might be owned by the prime broker.However, trades conducted via that terminal are initiated by the clientinstitution.

In one preferred embodiment, the party on whose behalf the prime brokertrades is a hedge fund. The hedge fund comprises a plurality of fundsand enters the list of funds into the trading system, and provides themto the prime broker who maps them onto existing codes for those parties.The hedge fund, on receipt of a deal ticket breaks the completed dealdown into a plurality of deals related to the plurality of hedge funds.The deal ticket may include information enabling the deal to be brokendown.

In one preferred embodiment, the prime broker customer may itselfexecute a further deal for the same amount with one of its owncustomers. This deal may be at the same price as the deal it concludedwith the prime broker or may be weighted to include a transaction fee.

Multiple prime brokers may be available to a given party. The party mayinclude a display of the prices available from each of a plurality ofprime brokers or just the best prime broker price available.Alternatively, the price shown may be a blend of the best prime brokerprice and the best price available by direct dealing.

Preferably, credit between a prime broker and its customer is netted, sothat credit is adjusted following a deal made by the prime broker onbehalf of a customer in the opposite direction for a buy trade than fora sell trade.

Preferably, the matching rules run by the matching engine follow aprice, time priority unless the prime broker, trading on its own behalfhas a more recent quote in the market at the same price. In this casethe prime broker quote is matched in preference to the earlier quote.

Preferably, each of the prime broker and its customers may see thequotes submitted via the prime broker, for example via a deal panel.Each of the customer and the prime broker may grant permission to theother governing viewing of the quotes.

Embodiments of the invention are advantageous to the prime brokers,their clients and to the operator of the anonymous trading system. Theclients are typically smaller institutions who do not have credit withmany of the parties trading on the system. This means that they areunable to deal many of the best prices. As the system only shows themprices that they can deal, they will only be aware of the best pricesfrom outside the trading system. Embodiments of the invention give theseclient institutions or customers access to better prices by relying onthe credit extended to the prime broker, which is typically a largerinstitution. Clients have an increased probability of their orders beingexecuted and tighter prices to quote their own customers.

To the prime broker, embodiments of the invention have the advantage ofaccess to a greater number of counter-parties for cross-selling,increased market exposure and increased market flow as well as increasedrevenue.

Embodiments of the invention are advantageous to the operator of theanonymous trading system as they increase the liquidity in the marketfor the instrument or instruments being traded on the system. Thisfacilitates trades and leads to increased revenue which is typicallygenerated on a per trade basis.

Embodiments of the invention will now be described, by way of exampleonly, and with reference to the accompanying drawings, in which:

DESCRIPTION OF DRAWINGS

FIG. 1 is a schematic diagram showing a prime broker deal code in ananonymous trading system;

FIG. 2 shows how the prime broker assigns trading limits to each clientinstitution;

FIG. 3 shows how the prime broker client can deal a quote through theprime broker that is not available to it in its own right;

FIG. 4 illustrates how the prime broker executes a second deal with theclient institution after completion of a deal instigated by the client;

FIG. 5 illustrates how the deal of FIG. 4 is displayed at the clientinstitution terminal;

FIG. 6 illustrates how a trade conducted via a prime broker results infour deal tickets;

FIG. 7 is a schematic overview of the entire deal process;

FIG. 8 is a more detailed view of the deal process executed on a firsttrading system architecture where the quote is submitted through theprime broker;

FIG. 9 is a similar view to FIG. 8 where a quote is hit through theprime broker;

FIG. 10 shows a first client screen display;

FIG. 11 shows a second client screen display; and

FIG. 12 illustrates a further embodiment of the invention.

DESCRIPTION OF PREFERRED EMBODIMENTS

In the embodiment to be described, a larger institution allows a smallerinstitution having limited credit to utilise the larger institution'scredit. The smaller institution gets the benefit of seeing quotes whichit cannot ordinarily deal and so can execute deals at better prices. Inreturn the larger institution charges the smaller institution for theuse of its credit. The trading system's operator benefits from anincrease in trades, from additional subscribers to the system, and froman increase in liquidity which can make less common currency pairsviable. All these benefits increase the operator's revenues from thesystem.

In the embodiment to be described, the larger institution assigns a dealcode to deals executed by clients using its credit. This deal code isseparate from the code used for its own deals. As soon as such a deal onthe third party deal code has been concluded with a counter-party, afurther deal is concluded between the larger bank and its client. Thisfurther deal may be an exact mirror of the first deal or may beadjusted, for example, by changing the buy/sell price, to take intoaccount the larger bank's fee for the first deal. The counter-party tothe first deal is not aware of the identity of the client bank and isonly aware that it has concluded a trade with the larger bank. Thelarger bank acting in this manner is referred to as a prime broker.However, the counterparty may, in a preferred embodiment, see that thedeal was concluded with a prime broker deal code at the larger bank.Thus the counterparty knows that a third party was involved but does notknow the identity of that third party. By using a separate deal code forprime broker deals, a virtual trading floor is effectively created forprime broker deals, that is deals made by the prime broker institutionthat are initiated, or made on behalf of, a third party.

FIG. 1 illustrates an anonymous trading system generally at 10. Thismay, for example, be one of the systems disclosed in U.S. Pat. No.5,375,055. Alternatively, any other anonymous trading system may beused, for example, that of EP-A-399850. In the example to be described,the instrument being traded is FX Spot. However, any other fungible,including financial and non-financial instruments may be traded on asystem embodying the invention.

Although described with respect to an anonymous trading system, thesystem need not be anonymous.

Whatever the nature of the trading system it is to be understood that itis a computerised system which matches and trades quotes automaticallywithout human intervention beyond the inputting of quotes into thesystem by a trader. Even this trader input is not necessarily essentialas systems have been developed which allow automatic generation ofquotes. These are referred to as automatic trading interfaces and aredisclosed in our co-pending application U.S. Ser. No. 10/205,535, thecontents of which are incorporated herein by reference.

The following description includes discussion of the message flows invarious embodiments of the invention. It is to be understood that thesemessages are all, in nature, electronic messages sent between computersacross a telecommunications network. The exact nature of these messageswill depend on the telecommunications standard adopted.

For example, the network may be a private communications network or itmay be a public network such as the Internet in which case a TCP/IPstandard may be used for message transfer.

It follows that the various physical elements described in the followingembodiments represent computers. Reference is made to known anonymoustrading systems such as that widely used in the FX Spot trading marketand provided by EBS Dealing Resources. Other examples are the Dealing2000/2 and 3000 systems provided by Reuters PLC. The architecture andfunctionality of these systems is well know to those skilled in the art.

In the general discussion of the figures, reference is made to banks, aprime broker and a back office system. The banks and the prime brokerare to be understood as bank node computers under the control of a givenbank. These are well known, for example from the EBS system and U.S.Pat. No. 5,379,055 referred to above, however, their functionality andthe messages they receive, construct, process and send are changed inthe manner described below. In an alternative architecture, such as onebased on a network of braking nodes as disclosed in GB-A-2363876 theyform a part of the broking node computers.

Similarly, the trader terminals may be conventional computerworkstations which provide a display of the market to traders and permittraders to enter quotes into the system, for example by means of akeypad. In one embodiment, this display is modified to show two marketdisplays, one available through a conventional trading route and are viaa prime broker. As mentioned above, quotes could be input automaticallyby an automated trading interface which generates quotes in response topredetermined changes in market conditions.

A number of bank trading floors are connected to the trading system toenable traders at trader terminals on the trading floors to trade withcounter-parties via the trading system. Each trading floor has a uniquedeal code, usually a four character code which identifies the floor toother traders on the system. An institution may have a number of tradingfloors which could be located in different countries or cities. Inpractice, many trading floors are connected to the trading system 10.For convenience, the example of FIG. 1 shows three trading floors: BankABCD 12, Bank XYZA 14 and Prime Broker PBXX 16. All trading floors onthe system assign credit limits to all the other trading floors on thesystem which whom they wish to deal. The credit limits dictate theamount of trading that is possible between counter-parties. The tradingfloors also assign credit to the prime broker deal code. That deal codealso assigns credit to the other counter-parties. The prime broker is adeal code that is set up to allow third party clients of the primebroker institution to trade using the institution's credit. It is not aphysical trading floor as such. As it has its own deal code,counter-parties will see that they have traded with a prime broker butwill not be aware of the client of the prime broker who was responsiblefor the trade. This is important as that client may be a party withwhich the counter-party has refused credit or would not ordinarily dealwith except at an unfavourable rate. As discussed below, a prime brokerdeal code is not essential but is advantageous. Prime broker deals maybe conducted through a conventional deal code used for regular trades bythe bank or institution.

Thus, in FIG. 1, the trading floor administrator 18 at bank ABCD assignscredit to the trading floor PBXX but does not assign credit to tradingfloor XYZA, as shown at 24. In contrast, trading floor XYZA at 28assigns credit to both trading floors PBXX and ABCD. As bilateral creditdoes not exist between ABCD and XYZA the two parties cannot trade witheach other on the conventional EBS or Reuters systems referred to aboveas bilateral credit is required for a deal to proceed. Quotes enteredinto the system by trading floor ABCD will not be seen by trading floorXYZA as the credit filter will exclude those quotes from the market viewmade available to the traders on the XYZA trading floor. The market viewonly shows those quotes from trading floors with which there is credit.Thus, trading floor XYZA is excluded from dealing with trading floorABCD. If floor ABCD is putting the best quotes in the market into thesystem, floor XYZA will miss out on the opportunity to deal at thoseprices.

The prime broker deal code PBXX also assigns credit to all the tradingfloors on the system. As shown at 26, the prime broker floor assignscredit both to the ABCD trading floor and the XYZA trading floor. Thusthe prime broker deal code PBXX can deal with both the ABCD and XYZAtrading floors.

Referring to FIG. 2, the prime broker trading floor administrator 20also assigns trading limits for each prime broker client. These limitsdefine the extent to which a client can trade using the prime broker'scredit and appear to the rest of the trading floors as the prime brokertrading floor. They also indicate for which deal codes on the system itis willing to act as a prime broker. If no credit is assigned, the primebroker is not willing to act as a prime broker for that party. Thesetrading limits are typically daily limits. Thus, at 30 the prime brokerTrading Floor Administrator (TFA) 20 assigns limits of $10M (million) totrading floor XYZA and $15M to trading floor XYZB. If the credit fallsbelow a defined minimum threshold the client will not be able to viewprime broker prices. The credit limits and the authority to trade may besubmitted to the trading system depending on the architecture of thesystem and, in particular, where credit limits are stored on the system.

Preferably credit is netted. Credit netting in an anonymous tradingsystem is described in our co-pending application Ser. No. 09/898,305the contents of which are incorporated herein by reference.

The prime broker bank will set up credit for each prime broker clientthrough the TFA workstation 30. The prime broker bank will have a totalpool of credit for each counter-party and part of that credit will beallocated to the prime broker clients. The remainder will be reservedfor the prime broker bank's regular trades where it does not act as aprime broker.

In a netting credit model, a buy and sell are treated as having apositive and negative effect respectively on the credit limit. Thus, aprime broker client bank can approach their credit limits from both thepositive and negative sides. If a client bank has reached their creditlimit on one side, they may still place orders on the other side. Thus,if the client has a credit limit of $30M with the prime broker andreaches that limit on the buy side, he may continue to sell as thosetrades have the effect of lowering the credit. Once a sell transactionhas been completed, the client will be able to buy again up to the valueof the sell transaction whereupon the credit limit will be hit again.

Referring now to FIG. 3, each of the prime broker clients has a traderterminal that is the prime broker institution's terminal. When a traderat the client trading floor logs on to that terminal, he logs on as atrader on the prime broker institution's prime broker deal code. Theprime broker terminal may be a physically separate terminal or may beaccessed by using a separate login routine at a common terminal that isalso used by the trader for trading activities in the name of hisinstitution.

In the example of FIG. 3, the terminal is physically different and theprime broker client has a prime broker terminal 32 displaying a firstmarket price and his own institution's terminal 34 displaying a secondmarket price. A trader 36 at trading floor ABCD submits an offer at 11.The trader 38 at trading floor XYZA does not see this offer at his ownterminal 34 as his trading floor does not have credit with trading floorABCD. His terminal shows 15 as the best offer in the market. However,his prime broker terminal shows the offer at 11 as the prime brokerinstitution has credit with trading floor ABCD. In this example itshould be understood that the prices given are the ‘pips’ or leastsignificant digits of the price. The display on the trader terminal 34might represent, for example, an opportunity to buy Euros at $1.1011 andto sell them at $1.1015, where the currency pair being traded is Euro:USDollar.

Referring now to FIG. 4, the trader 38 at institution XYZA hits theoffer at 11 using the prime broker terminal or workstation 32. The offerat 11 will be for an amount, for example 1 million, and the prime broker16 will reserve this amount from the credit it extends to trading floorXYZA. The credit is not changed at this point as the deal has not beencompleted. The hit is communicated through the trading system to thetrader 36 at trading floor who sees a pending buy from deal code PBXX.Trader 36 is aware that PBXX is a prime broker deal code and so knowsthat the hit has come from a client of the prime broker institution.However, the trader 36 cannot find out the identity of that client. Atthe trader's bank ABCD, or within the trading system 10 depending on thearchitecture of the system, a credit check is carried out to determinewhether there is sufficient credit to complete the hit order. However,it is the bilateral credit between ABCD and PBXX that is checked. Thecredit between ABCD and XYZA is irrelevant.

Once the deal between ABCD and PBXX has been completed, a complementarydeal is completed between PBXX and the client XYZA. In return forallowing XYZA to utilise its credit, the prime broker institutioncharges XYZA a fee. This fee may be on a per transaction basis and canbe levied in a number of ways. First it could be charged to XYZAcompletely separately from the deal between PBXX and XYZA. For example amonthly invoice could be sent detailing all the transactions for whichPBXX has acted as a prime broker. Alternatively, the fee could beincorporated into the deal between XYZA and PBXX. In FIG. 5 the fee isadded into the deal price so that a deal display panel at the primebroker workstation 32, which shows all deals conducted by XYZA throughthe prime broker shows the deal with the fee added into the deal price.In FIG. 5, the deal at 11 is shown as the final BUY deal 40 on thefourth line of the display. Although the deal between the prime brokerPBXX and ABCD was at 11, the deal between PBXX and the client XYZA is at11.5 with the additional 0.5 representing the prime broker's fee. Thedeal is shown at 11.5 in the trader's deal display panel. Alternatively,the deal between PBXX and XYZA could be completed at the same price asthe deal between ABCD and PBXX, but the price shown to XYZA couldincorporate the prime broker fee. Other mechanisms for charging thebroking fee are possible and will occur to those skilled in the art.

As shown in FIG. 5 the deal completion process between PBXX and ABCDrequires a further credit check to be made at PBXX to check that thereis credit between PBXX and ABCD. As each side assigns its own creditlimits, it is possible for PBXX to have credit with ABCD but not viceversa. Assuming that the credit exists, the deal is completed and amessage is sent to the trading system 10 by both parties, with ABCDadvising the system that it has sold an amount at 11 to PBXX and PBXXadvising the system that it has bought an amount at 11 from ABCD. Thedeal completion message is sent to ABCD and then communicated to thetrader's workstation where it can be seen in the trader's completed dealpanel which identifies PBXX as the counter-party.

As part of any deal on the anonymous trading system 10, when a deal iscompleted, a deal ticket is issued to each side of the deal. FIG. 6shows how a deal conducted through a prime broker results in 4 dealtickets being issued. A first ticket 42 is issued to the ABCD backoffice system 44 confirming that ABCD sold at 11 to PBXX. A secondticket 46 is issued to the PBXX back office system 50 confirming thatPBXX bought at 11 from ABCD. The system 10 issues a third ticket 52 tothe PBXX back office system 50 confirming that PBXX sold at 11.5 to XYZAand a fourth ticket 54 which is sent direct to the XYZA back officesystem 56 if bank XYZA has a deal feed client installed confirming thatXYZA bought at 11.5 from PBXX.

FIG. 7 illustrates the complete order cycle for the deal that has beendescribed. At step 100 the trader 36 at institution ABCD submits anoffer to sell at 11 into the trading system. This offer is passed from,for example, the ABCD bank, or market access node if the anonymoustrading system is that described in U.S. Pat. No. 5,375,055, into theanonymous trading system market distributor and arbitrator at step 102.The market distributor performs the function of distributing quotes inthe market to traders and assembling market views for each trading floorbased on a credit matrix detailing the parties with which that tradingfloor has credit. The arbitrator includes a matching engine and matchesquotes to enable deal execution. In some trading systems, thesefunctions of market distribution and matching are performed by separatecomputers at separate locations. In other systems they are combined. Atstep 104 the XYZA trader, trading through the prime broker terminal,hits the offer to sell and this hit is communicated to the system at 105as a request to buy from dealing floor PBXX. At the same time, thetrading floor PBXX reserves the deal amount against the credit XYZA hasto deal through PBXX as a prime broker. This credit adjustment is madefinal when the deal has been completed. The system at 106 communicatesthis order as a willingness to buy to the trader terminal at ABCD. Bothsides then perform a credit check at 108 to ensure that there issufficient bilateral credit between ABCD and PBXX to fulfil the order.Once credit has been established, prime broker PBXX notifies the systemat 110 of the deal with a message ‘Bought at 11 from ABCD’. It alsonotifies ABCD at 112 that the deal has been completed. At 114 ABCDpasses on the notification to the trader terminal in a message ‘Sold at11 to PBXX’. A second deal for the same amount at 11.5 is concludedbetween PBXX and the client bank XYZA and a message 115 sent to theprime broker terminal 32 at bank XYZA stating ‘Bought at 11.5 from PBXX.This message is displayed in the completed deals panel of thatworkstation. At 116 a deal ticket is sent to the ABCD back office systemstating that ABCD sold at 11 to PBXX. At 118 two deal tickets are sentfrom the prime broker 16 to the DEFX Back Office system stating thatPBXX bought at 11 from ABCD and sold at 11.5 to XYZA. Finally at 120, adeal ticket is sent to the XYZA Back Office system stating that XYZAbought from PBXX at 11.5.

The system described above has the advantage that institutions withlimited credit are given access to better prices by utilising the creditof other institutions. In return, the institutions who allow theircredit to be used gain financially for each trade that is conducted intheir name. The anonymous trading system benefits as more orders areentered into the systems so increasing the liquidity in the currencypairs being traded. The system described has the further advantage thatlarge trades may be conducted through a prime broker without theidentity of the trading party being revealed to the market. In prior artsystems, orders are typically for amounts in the range of $1M to $5M. Ifa trader wants to trade a very large amount such as $50M, the order willnot be filled by a single trade but by a number of trades. Although thesystem is anonymous, other traders on the system can see the identity ofthe parties to all completed deals. They can therefore see that there isa series of deals having the same party on one side. They conclude thatthere must be a large order that needs to be dealt and will adjust theirprices on the assumption that the party dealing will be prepared to paya higher price to complete the order. The system described above avoidsthat possibility. The other traders will see a string of deals havingthe prime broker on one side. However, they will know that the primebroker is acting for many clients and they will not be able to tell thatall the deals originate from a single client.

The message flow in the example above has been simplified for the sakeof clarity. FIGS. 8 and 9 show the complete message flow during thesubmission and hitting of quotes respectively. The system shown in FIGS.8 and 9 differs from that of FIGS. 1 to 7 in that there is not aseparate prime broker terminal at the client bank XYZA. Instead, theoption to trade through the prime broker is presented within the sametrading screen display that the trader uses to trade on behalf of bankXYZA. In the FIG. 8 example the trader's display has two parts. Thefirst part, 130 shows the best bid and offer prices that the trader canget trading as XYZA. The second part 132 shows the best prices availableby trading via the prime broker. This arrangement is convenient as thetrader does not have to watch two screens but can easily see which ofthe two available routes will give him the best price. If the prices arethe same he will trade as his own bank to avoid paying a prime brokerfee. This display is shown in more detail in FIG. 10 and a variant isshown in FIG. 11. Both will be described in greater detail below.

In the example of FIG. 8, in contrast to that of the previous figures,the XYZA trader, trading via the prime broker is the market maker. Thetrader puts an offer to sell at 11 into the market through the primebroker at step 200. The trader can choose if the offer is submitted inhis own name or in the name of the prime broker. If the quote issubmitted in the trader's own name, that is XYZA, then the tradingsystem will match the quote with other quotes in the market using XYZA'scredit first and will then use the prime broker's credit in cases ofintentional automatch. Any amount left over is made available to othercounter-parties in the trader's name. If the quote is submitted in theprime broker's name, the trading system will also match the quote withother quotes in the market using XYZA's credit first and will then usethe prime broker's credit in cases of intentional automatch. However,any amount left over is made available to other counter-parties in theprime broker's name. Regardless of the name in which the quote issubmitted, the trader always retains control over the quote and has theability to interrupt the quote instantly to withdraw it from the market.

Within the trading system, matching of the quote is performed on thebasis of price, credit and time priority. Referring back to FIG. 8, theexample to be described assumes that the matching is made using theprime broker's credit. The quote entered by the maker is sent to theprime broker 16 at step 202 which checks the amount of the quote againstthe credit limit for trades conducted via the prime broker. From theperspective of the rest of the system, the prime broker 16 now owns thisquote. At step 204 the quote is sent to the arbitrator within thetrading system whereupon the trading system distributes the quote makingit visible to other traders who have credit with the prime brokertrading floor. At 206, the trader at bank ABCD 14 hits the quote,submitting an order to buy at 11. This order is passed to the arbitratorat 208 and sent to the prime broker at step 210. At this point creditchecks are performed for the taker and the maker. The next four stepsverify that the quote is good, that is that the maker wishes the quoteto remain in the market and be dealt. At 212, the prime broker sends a‘Quote Good?’ Message to the maker bank node and at step 214, the makerbank node sends a ‘Quote Good?’ message to the maker workstation. Theworkstation replies with a ‘Quote OK’ message 216 verifying that thequote is good and is to be dealt. This message is sent to the maker banknode which then sends a ‘Quote OK’ message 218 to the prime broker.

At steps 220 to 230, the system executes a deal between the prime brokerand the taker in a conventional manner. Thus at 220 the prime brokersends a ‘Buy at 11?’ message to the taker bank node. The taker bank nodeat 222 sends a ‘Bought at 11’ message to the arbitrator and at 224 sendsthe same ‘Bought at 11’ message to the prime broker. At 225 a ‘Sold at11 to taker’ message is sent from the prime broker to the arbitrator 10.At 226 an ‘InstrMaker’ is sent from the prime broker to the taker and at228 an ‘InstrTaker message is sent from the taker to the prime broker.These two messages complete the deal and inform the parties that thedeal has been completed.

A deal also needs to be concluded between the prime broker and themaker. In this example the deal is concluded at the same price as thedeal between the prime broker and the taker. The ‘Bought at 11’ messageis also sent from the prime broker to the maker bank node and an‘InstrMaker’ message sent from the maker bank node to the prime brokerfollowed by an ‘InstrTaker’ message from the prime broker to the makerbank node. The deal is now complete and the deal tickets sent inelectronic message form to the back office computer systems at themaker, taker and prime broker to allow logging and settlement of thedeals by the back office computer systems.

Referring to FIG. 9, the situation where a hit is submitted into thesystem is shown in more detail. This is an expanded version of theprocess shown in FIG. 7. Hits or takes submitted through the primebroker are also matched in price, credit and time priority and thetaker's credit will always be used first if it exists. If the taker doesnot have credit the prime broker's credit will be used. As in theexample above, where the prime broker's credit is used, two deals aredone, one between the prime broker and the counter-party and one betweenthe prime broker and the client. Again the maker, who is thecounter-party to the prime broker never knows the identity of the takertrading through the prime broker.

The message flow is shown in FIG. 9. At step 300 the maker ABCD 12submits a quote into the system offering to sell at 11. At step 302 thisoffer is communicated to the arbitrator whereupon it is distributed tothe market. The trader at bank XYZA 34 will not see this quote in hisregular display as he does not have credit with the maker bank ABCD.However he will see it in his prime broker display as the prime brokerhas credit with the maker bank. At step 304, the taker trader hits thequote through the prime broker, sending a message ‘Buy at 11 throughprime broker’ to the taker bank node 14 which in turn sends a message‘Taker request to buy at 11 through prime broker’ to the arbitrator atstep 306. The arbitrator, on receiving the hit, tries to match it usingthe taker's credit first. If no credit exists or a better price quotecan be matched based on the prime broker's credit the arbitrator selectsthe prime broker and, at step 308, the arbitrator 10 forwards the ‘takerrequest to buy at 11 through prime broker’ message to the prime broker16 which accepts the request at step 310 after checking that the dealamount does not exceed the taker's credit with the prime broker. Thearbitrator then sends, at 312, a ‘prime broker willing to buy at 11’message to the maker bank node 12 which sends a ‘quote good’ message tothe trader workstation at step 314 to check that the trader still wantsto trade. If the trader wishes to continue he replies with a ‘quote OK’message to the bank node at 316. The deal is now completed inconventional manner with a ‘Buy at 11’ message 318 being sent from themaker to the prime broker, credit checks being made for both the makerand the prime broker and a ‘bought at 11’ message 320 being sent fromthe prime broker to the maker with a ‘Bought at 11 from maker’ message322 being sent by the prime broker to the arbitrator. This is followedby an exchange of ‘InstrMaker’ and ‘InstrTaker’ messages 324, 326between the maker and the prime broker. The second deal between theprime broker and the taker is then concluded with a ‘Buy at 11?’ Message328 being sent by the prime broker to the taker and a reply message‘Bought at 11’ 330 being returned by the taker to the prime broker. Atthis point the taker's credit with the prime broker is reduced, theamount having already been reserved when the prime broker originallyaccepted the request to buy on behalf of the taker. The taker also sendsa message ‘Bought at 11 from prime broker’ to the taker workstation at332 and exchanges ‘InstrMaker’ and ‘InstrTaker’ messages 334,336 withthe prime broker. Following completion of the deals, deal ticket will beproduced for the maker, the taker and the prime broker as discussedabove.

As mentioned above, the trading rules require that orders are matched onthe basis of price, credit, and time. In a preferred embodiment of theinvention there is one situation where this rule is not observed. Theorder matching is modified to allow a floor within a prime broker bankinstitution to jump the queue of one if their prime broker customersattempts to hit a bid or pay an offer which is at the same price as abid or offer they have in the market. If the offer is stacked with morethan one counterparty, and the prime broker bank is not the first on thelist, the prime broker bank is automatically pronounced to be first onthe list and is then executed against the prime broker client as aregular deal with no prime brokerage fee.

In the example of FIG. 3 to 6, the client bank XYZA has a dedicatedprime broker terminal in addition to its usual trading terminal. In theexample of FIGS. 8 and 9, the trader has a single terminal whichdisplays both the regular best prices that can be obtained using itsbank's credit and the best price that can be obtained using a primebroker. Two versions of this display are shown in FIGS. 10 and 11respectively. In FIG. 10 a single display panel is presented to thetrader with the regular prices shown above the prime broker prices. Thisarrangement is particularly convenient as it allows the trader to seethe opportunities for trading through a prime broker easily. Thearrangement of FIG. 11 is intended for a multiple panel display in whichthe regular prices are shown in one panel shown in FIG. 11 a and theprices available through a prime broker are available through anotherpanel shown in FIG. 11 b. These two panels may be only two of a numberof panels that are displayed to the trader. For example a display maycomprise regular and prime broker panels for a plurality of currencypairs.

In order that the arbitrator can generate the market views displayed tothe trader, it maintains an additional credit vector of bilateral creditbetween each customer and the prime broker. This credit vector is sharedwith the marker distributor, or broking node if the market distributionfunction is provided by a broking node rather than a separate marketdistributor as disclosed in GB-A-2363875, so that it can generate themarket view to be displayed in the prime broker price panel.

In the examples described above, the assumption has been made that thereis only a single prime broker. In practice it is likely that a number ofbanks will want to offer prime broker services as they provide anattractive revenue stream. Thus, as any bank offering prime brokerservices is likely to have credit with all or nearly all possiblecounter-parties on the system, a trader wishing to use a prime brokerhas a choice of possible prime brokers. Thus a decision must be made asto which prime broker to use. This could be specified by a userpreference based on, for example, the fee structures charged by theprime broker so ensuring that the minimum fee is paid. Alternatively thedecision could be left to the arbitrator. Referring back to the exampleof FIG. 9, before the arbitrator sends the ‘taker request to buy at 11’message 308 it must decide to which prime broker the message is to besent. This may be done in a number of ways, for example on a round robinbasis or on the basis of preference supplied by the taker. Thosepreferences may be predefined of indicated in the ‘taker request to buythrough prime broker’ message 306. For example this message could beamended to append the deal code of the preferred prime broker.

Where multiple prime brokers are used, both sides of a deal could actthrough a prime broker. Thus, an institution ABCD could act throughprime broker PBXX and an institution XYZA could act through a primebroker DEFX. The actual deal would be concluded between trading floorsPBXX and DEFX. Separate deals, in the manner discussed above, would thenbe concluded between ABCD and PBXX and DEFX and XYZA. This would resultin six deal tickets being generated.

At the customer, multiple prime brokers may each have a separateterminal used by the trader to trade through a selected prime broker.However, an alternative approach is to include a price panel at theprime broker client's workstation for each prime broker enabling theclient to compare the prices available on-screen. The use of multipleprice panels in a single trading screen is known and typically used toallow traders to keep track of several currency pairs simultaneously.The use of multiple trading panels is disclosed in our provisionalapplication U.S. 60/478,570 the contents of which are incorporated byreference.

Alternatively, or additionally, the prime broker codes could haveassociated voice functionality so that prime broker prices are announcedto the client. The use of voice announcements is disclosed in U.S. Pat.No. 5,806,050.

An alternative to multiple price panels is to display a blended primebroker rate, whereby the prime broker client sees only the best primebroker rate. This requires the market distribution functionality tostore details of the prime brokers with which a given client operatesand to assemble a best prime broker view for distribution to the client.Both of these last two options have the advantage of requiring only asingle prime broker terminal at the customer. This functionality couldbe provided on a single screen in addition to the traders own directtrading prices. A further alternative arrangement provides a blendedprice showing the best rate that this available either through a primebroker or through direct dealing. It is preferred that the direct priceis shown if the prices are equal as direct trading does not incur primebrokerage fees.

In one preferred embodiment, the prime broker bank may view the dealsbeing made by prime broker customers. A conventional trader displayincludes a Trader Deals panel which lists the deals done by that trader.In the preferred embodiment a similar panel is available at the primebroker bank which lists active orders with sizes for prime brokercustomers. The prime broker bank terminal can select whether or not todisplay this panel. The panel may include only done deals or may includeoutstanding quotes in the market as well. It is preferred that theidentity of the prime broker customer is not displayed.

The ability may be given to prime broker customers to permissionindividually whether prime broker banks can see their orders on theprime broker customer orders panel. Similarly, the prime broker banksmay permission whether they can see the prime broker customer orderspanel on a per customer basis. It is important that no prime brokercustomer can see the identity of other customers of the same primebroker bank.

In one modification of the embodiments described, prime broker customersare able to white label their prime broker prices to other banks. Thisis illustrated in FIG. 12. A prime broker bank ABCX 400 has a creditrelationship with bank BCDE 410 enabling bank BCDE to trade as a primebroker customer of bank ABCX. The prime broker customer BCDE has its owncredit relationship with a number of its own customers CDEF 420, DEFG430 and EFGH 440. The prime broker customer BCDE will apply a spread tothe prices it shows to its customers 420, 430 and 440 and for a price tobe hit, there will be three separate deals and six deal tickets. Thefirst deal is between the prime broker bank and the counterparty. Thesecond is between the prime broker bank ABCX and its customer BCDE andthe third is between the customer BCDE and one of its customers 420,430, 440.

As far as the prime broker bank is concerned, its only exposure to riskis with the counterparty bank and its customer BCDE 410. In other words,there is no additional risk. To the prime broker customer, there is thesame advantage as in the previous embodiments together with the abilityto offer prices to its own customers and profit from the spread applied.To the customer's customers 420, 430, 440 the advantage is that theyhave access to liquidity and prices that would otherwise be unavailableto them.

Although not shown in FIG. 12, it would be possible for the customersCDEF 420, DEFG 430 and EFGH 440 themselves to enter into creditrelationships and offer the prices they receive to customers subject toapplying a spread.

In the embodiment described, it has been assumed that the prime brokercustomers are banks or similar financial institutions. This is notnecessarily the case. In one embodiment of the invention, the customerscomprise one or more hedge funds. The nature of hedge funds imposes somerequirements on the system.

Hedge funds require that most of their positions are broken out intomultiple funds breakout. To facilitate such a trade, a prime brokercustomer must be able to load a list of all accounts into the tradingsystem. This enables the customer to link the account and the amount ona post deal basis. The prime broker bank is provided with a pre-dealinterface to acknowledge that the prime broker bank understands thebreakout name. The prime broker bank may need to amend the name to matchits own internal systems. This is conveniently done via a mapping table.

Thus, where the customer is a hedge fund, they can enter the list offunds into the trading system. This is conveniently performed by thetrading floor administrator terminal into which the finds information isloaded. The funds information is also passed to the prime broker bankfor mapping of the funds information to the bank's back office codes.

Once deals have been completed, deal tickets are provided via a dealfeed interface or, where used, an automated trading interface. A hedgefund prime broker customer must be able to select a deal reported fromeither of these sources and break it out into several sub-accounts. Thedeal passed through the deal feel or ASI is effectively a series oflinked deals enabling them to be property allocated into the correctaccounts.

Many modifications to the embodiments described are possible and willoccur to those skilled in the art without departing from the scope ofthe invention. For example, the use of a separate deal code for a primebroker, although convenient, is not essential. A prime broker deal maybe made through any regular trading floor of the prime brokerinstitution. It is also not essential to show the prime broker anddirect prices separately at the trader's workstation. It is possible tocombine these together so that the trader is simply shown the best pricethey can obtain either by trading in their own right or through a primebroker. In such an environment the system will be arranged such that atrade will always be made in the name of the client bank if creditexists, as this avoids the client bank having to pay a fee to a broker.In this situation, the arbitrator will maintain an additional creditvector of bilateral credit between each client and the set of primebrokers. The market view will be generated from this vector togetherwith the bank's own credit vector with the available counter parties.

Although it has been mentioned that the identity of a prime brokerclient is not given up when a prime broker deal is concluded, the systemcould be configured so that the identity of the client is displayed,with or without the identity of the prime broker trading floor.

The nature of the trading system is not important. In addition to thetwo systems mentioned above, both of which are distributed systems,embodiments of the invention may be implemented on a centralised system.Embodiments of the invention may be implemented on systems that usededicated communications networks to communicate between the variousworkstations and other elements of the systems. Alternatively, a publicnetwork such as the internet may be used. The communications networksused by anonymous trading systems are well understood by those skilledin the art.

It will be appreciated that embodiments of the invention provideadvantages to banks or other financial institutions using prime brokers,the prime brokers themselves and the trading system operator. From thepoint of view of the client bank they are given access to better pricesvia greater credit in the market, increased probability of execution oforders and tighter prices with which to quote to customers. These givethe client banks a better competitive position in the market. From thepoint of view of the prime brokers, they have access to a greater numberof global counter-parties for cross selling, increased market exposure,increased market flow and increased revenues through the fees generatedby the prime broker services.

The advantages to the provider of the anonymous trading system includean increase in the liquidity pool which facilitates trades. This isespecially important in currency pairs in which there are not manytrades and may increase liquidity in a given currency pair to the extentthat it becomes attractive to trade the currency on the system.Moreover, by increasing the number of trades performed on the system thesystem provider increases their own revenues which are typicallygenerated on a per trade basis.

In all the embodiments described, it is preferred that a separate dealcode is assigned for prime broker customers. This enables regular dealsby the prime broker bank to be separated from customer deals andfacilitates the handling and allocation of credit as between primebroker trading floors and prime broker customers. The prime broker dealcode need not have any physical existence and does not require aphysical presence at the prime broker bank.

In practice it is convenient for the deal code to be administered by aseparate TFA terminal at the prime broker bank but this is notessential.

Many other alternatives to the embodiments described are possible andwill occur to those skilled in the art without departing from the scopeof the invention which is defined by the following claims.

1. A computerized method of trading instruments on an anonymous tradingsystem in which a matching engine matches orders submitted bycounterparties on the basis of order price and bilateral credit betweencounterparties, comprising, in the absence of credit between a first anda second party, utilizing the credit of an intermediary party havingbilateral credit with both the first and second parties to enable firstand second party orders to be matched.
 2. A method according to claim 1,wherein the credit of the intermediary is utilized by executing a tradebetween the intermediary and the second party and a trade for the sameamount between the intermediary and the first party wherein the tradebetween the intermediary and the second party is conducted using avirtual trading floor unique to trades by the intermediary on behalf ofother parties.
 3. An anonymous trading system for trading fungibleinstruments, comprising a matching engine for matching orders submittedby counterparties on the basis of price and bilateral credit betweencounterparties, the matching engine, in the absence of credit between afirst and a second party, utilizing the credit of an intermediary partyhaving bilateral credit with both the first and second parties to enablefirst and second party orders to be matched.
 4. A method according toclaim 3, comprising a prime broker deal code assigned by theintermediary to trades made on behalf of other parties utilizing theintermediary's credit, wherein the matching engine matches ordersidentified by the prime broker deal code with counterparty ordersthereby to utilize the intermediaries credit to enable the first partyto trade with the second party.
 5. An anonymous trading system fortrading fungible instruments, comprising: a matching engine for matchingorders submitted to the system for execution of trades; a plurality oftrading floors each for submitting electronic trading messages to thematching engine; a market distributor for distributing to each tradingfloor a market view unique to the trading floor and including the bestprice in the market with which the trading floor has bilateral credit,and for distributing to selected trading floors the best price availableby trading via a third party trading floor; wherein the selected tradingfloors include means for causing the third party trading floor toexecute a first deal at the best price available to the third partytrading floor, and to execute a second deal between the trading floorand the third party trading floor for the amount of the first deal.